Attitudinal Asymmetries and the Lender-Borrower Relationship: Survey Results on Farm Lending in Shandong,China

This paper addresses the problem of social interactions and the lender-borrower relationship by measuring the disconnect between borrowers and lenders across a wide range of lending-related attributes. The degree by which lenders and borrowers connect disconnect depends on whether lenders’ and borrowers’ perceptions across these attributes are symmetric or asymmetric. We compare field survey results from 120 loan officers at Rural Credit Cooperatives (RCCs) in China’s coastal Shandong province, and pair them with an existing survey on identical questions to 394 farm households in the same region. Pairing lenders’ perception towards borrowers regarding RCC microcredit lending mechanism, against borrowers’ perception towards lenders and how themselves were perceived by lenders in the same regards, we observe on many dimensions a disconnect between them in the context of lenders’ “care” towards borrowers, loan rejection, memberships of RCC and group guarantee, lending concerns, cost of borrowing, reasons for default, credit rationing, and lending preferences. This research provides financial institutions with outreach mechanisms to borrowers, while also training lenders to borrowers’ sensitivities.     

Learning by lending

This paper studies bank learning through repeated interactions with borrowers from a new perspective. To understand learning by lending, we adapt a methodology from labor economics to analyze how loan contract terms evolve as banks acquire new information about borrowers. We construct “proxy” variables for this information using data from borrowers’ out-of-sample, future credit performance. Due to the timing of their construction, banks could not have used these variables directly to price loans. We nonetheless find that these proxies increasingly predict loan prices as relationships progress, even after controlling for possible omitted variable bias. Our methodology provides strong evidence that: (a) bank learning affects loan prices, and (b) relationship benefits are heterogeneous. In particular, higher quality borrowers face differentially lower spreads as their relationship with lenders develop – and banks learn about their quality – while lower quality borrowers see loan prices increase and their loan amounts fall. We further find suggestive evidence that banks incorporate CEO-specific information into loan prices.     

Do Tighter Loan Covenants Signal Improved Future Corporate Results? The Case of Performance Pricing Covenants

Covenants in corporate bonds and loan agreements mitigate agency conflicts between borrowers and lenders and may provide a signal of borrower quality to help resolve information asymmetry. Performance pricing covenants in bank loans specify automatic adjustments to loan spreads based on borrowers’ subsequent performance. Our covenant signaling framework views interest‐decreasing performance pricing as a tight covenant associated with borrowers’ private information on improved future performance accompanied by reduced credit risk. This positive signal is associated with larger positive loan announcement returns and greater improvements in future borrower performance. Further, in addition to signaling value, we find that the spread impact of this class of covenant also depends on its option value and reduction in transaction costs.     

地理距离、契约设计与企业内部资本市场借贷风险防控——来自中国企业集团内部借贷交易的证据

地理因素对保持距离型市场交易的影响已被大量文献证实,但系统考察地理因素是否以及如何影响企业内部经济活动的研究仍十分匮乏。基于手工搜集整理的企业集团内部委托贷款这一独特数据,我们实证考察了地理距离对企业集团内部借贷契约设计的影响及相关的风险防控问题。实证结果显示,借贷距离越远,针对借款者的契约设计越严苛,不仅贷款者更可能要求借款者提供抵押担保,而且对资金用途施加限制的概率也大幅增加。进一步研究发现,与地理距离阻碍了信息搜集和监督的经济直觉一致,距离对企业内部借贷契约严苛性的推高作用会因为借贷双方之间的信息摩擦问题差异而改变。而且,基于借贷违约信息的检验结果表明,作为应对信息不对称的机制,动态调整契约严苛性这一精巧契约设计有效降低了企业内部贷款违约风险。本文不仅增进了对地理因素影响企业内部资本配置的认识,而且加深了对企业内部借贷契约设计的理解,从而对如何有效防控企业内部资本市场运作风险具有启示意义。     

Breakeven Determination of Loan Limits for Reverse Mortgages under Information Asymmetry

Since the loan limit of a reverse mortgage is a major concern for the borrower as well as the lender, this paper attempts to develop an option-based model to evaluate the loan limits of reverse mortgages. Our model can identify several crucial determinants for reverse mortgage loan limits, such as initial housing price, expected housing price growth, house price volatility, mortality distribution, and interest rates. We also pay special attention to the important implication of mortgage lenders’ informational advantage over reverse mortgage borrowers concerning housing market risk. In reverse mortgage markets, the elderly borrowers typically hold far less, relative to the lenders, or no information about the lenders’ underlying mortgage pools. Such information asymmetry leads these two categories of market participants to generate different perspectives on the risk of the collateralized properties, which can be identified to be important in determining the maximum loan amounts of reverse mortgages. We further find that the maximum loan amount of a reverse mortgage decreases in the correlation between the returns on the pooled underlying housing properties but increases with the number of the pooled mortgages.     

Loan Sales and the Cost of Corporate Borrowing

When a loan is sold, it goes to a lower-cost financing sourcethan its originator. Yet, lending markets are less than perfectlycompetitive. Despite the lower funding cost, therefore, theloan price is not necessarily more favorable to the borrower.However, corporate borrowers are averse to the participationof their loans to other lenders because of the complexity ofdealing with multiple banks and the potential information costsof the sale announcement. Consequently, I conjecture that theborrower extracts a price concession in exchange for allowingthe bank to sell participations in the loan. Using a hand-matcheddataset of loans, borrowers, and lenders, I find that the averageyield spread on loans originated by active loan sellers is about20 basis points lower than the average spread on loans originatedby moderate loan sellers.     

地理距离、契约设计与企业内部资本市场借贷风险防控——来自中国企业集团内部借贷交易的证据

地理因素对保持距离型市场交易的影响已被大量文献证实,但系统考察地理因素是否以及如何影响企业内部经济活动的研究仍十分匮乏。基于手工搜集整理的企业集团内部委托贷款这一独特数据,我们实证考察了地理距离对企业集团内部借贷契约设计的影响及相关的风险防控问题。实证结果显示,借贷距离越远,针对借款者的契约设计越严苛,不仅贷款者更可能要求借款者提供抵押担保,而且对资金用途施加限制的概率也大幅增加。进一步研究发现,与地理距离阻碍了信息搜集和监督的经济直觉一致,距离对企业内部借贷契约严苛性的推高作用会因为借贷双方之间的信息摩擦问题差异而改变。而且,基于借贷违约信息的检验结果表明,作为应对信息不对称的机制,动态调整契约严苛性这一精巧契约设计有效降低了企业内部贷款违约风险。本文不仅增进了对地理因素影响企业内部资本配置的认识,而且加深了对企业内部借贷契约设计的理解,从而对如何有效防控企业内部资本市场运作风险具有启示意义。     

Information Losses in a Dynamic Model of Credit

This paper examines dynamic information losses associated with loan terminations. We assume that the aggregated returns of current borrowers contain information about the mean returns to future borrowers. In a competitive loan market, the value of this information is not fully internalized by individual borrowers and lenders, and loan decisions fail to be first best. Introducing heterogeneous borrowers, who know their own risk characteristics better than lenders, safer borrowers are less willing to borrow when risk premia rise. As they cease borrowing, the information generated in credit markets becomes noisier and this tends to increase risk premia. The model produces alternating and persistent periods of “tight” and “loose” credit.     

Cost stickiness and bank loan contracting

This study examines whether and, if so, how borrowers' asymmetric cost behavior (i.e., cost stickiness) is factored into the price and non-price terms of bank loan contracts. We provide strong and reliable evidence that ex-ante, the loan spread increases with cost stickiness after controlling for other known determinants of loan contract terms. Moreover, we find that the effect is more pronounced for borrowers with higher default risk and higher information risk. This is consistent with borrowers' asymmetric cost behavior increasing lenders' uncertainty about the liquidation value of assets, and hence, lenders need to be compensated ex-ante. Additionally, we conjecture that higher cost stickiness may increase the need for ex-post monitoring. Consistent with this conjecture, we find some evidence that lenders impose tighter non-price terms on firms with stickier costs. This study integrates cost stickiness research with the banking literature by showing that banks incorporate borrowers' asymmetric cost behavior into loan contracting terms.     

The effect of information sharing between lenders on access to credit,cost of credit,and loan performance – Evidence from a credit registry introduction

Using a rich dataset from a commercial bank in Albania, we utilize the introduction of a public credit registry by the Albanian central bank in January 2008 as a natural experiment to analyze the effect of information sharing between lenders on (1) access to credit, (2) cost of credit, and (3) loan performance. Our results suggest that information sharing by means of a credit registry does not affect access to or cost of credit, but improves loan performance. Specifically, loans granted after the introduction of the credit registry are 3% points less likely of turning problematic, representing a 35% reduction of the overall sample average arrear probability. We further find that the effect is more pronounced for repeat borrowers and in areas, where competition is weak. This indicates that information sharing among lenders improves loan performance mainly by disciplining borrowers to repay in their concern about future access to credit.     

The Role of Bank Reputation in “Certifying” Future Performance Implications of Borrowers’ Accounting Numbers

We investigate the role played by the reputation of lead arrangers of syndicated loans in mitigating information asymmetries between borrowers and lenders. We hypothesize that syndications by more reputable arrangers are indicative of higher borrower quality at loan inception and more rigorous monitoring during the term of the loan. We investigate whether borrowers with more reputable lead arrangers realize superior performance subsequent to loan origination relative to borrowers with less reputable arrangers. We further examine whether certification by high‐reputation lead banks extends to the quality of borrowers’ reported accounting numbers. Controlling for endogenous matching of borrowers and lead banks, we find that higher bank reputation is associated with higher profitability and credit quality in the three years subsequent to loan initiation. We also show that bank reputation is associated with long‐run sustainability of earnings via higher earnings persistence, and debt contracting value of accounting via a stronger connection between pre‐loan profitability and future credit quality. We further document that the enhanced earnings sustainability associated with higher reputation lead banks reflects both superior fundamentals and accruals more closely linked with future cash flows.     

Fixed versus variable rate financing: The influence of borrower,lender, and market characteristics

Previous research has analyzed the problem faced by borrowers who must choose between fixed rate and variable rate loans when each loan carries different cost and risk characteristics and the borrowers face various income and employment prospects. In addition, the existing literature contains theoretical and empirical studies of how lenders react when given the ability to offer both fixed and variable rate financing. This article unifies the two strands of research to develop and test a model of the equilibrium proportion of variable rate lending. Results indicate that factors related to borrower, lender, and market characteristics are significant determinants of the equilibrium proportion of variable rate credit originated.     

Price Discovery and Dissemination of Private Information by Loan Syndicate Participants

We delineate key channels through which flows of confidential information to loan syndicate participants impact the dynamics of information arrival in prices. We isolate the timing of private information flows by estimating the speed of price discovery over quarterly earnings cycles in both secondary syndicated loan and equity markets. We identify borrowers disseminating private information to lenders relatively early in the cycle with firms exhibiting relatively early price discovery in the secondary loan market, documenting that price discovery is faster for loans subject to financial covenants, particularly earnings‐based covenants; for borrowers who experience covenant violations; for borrowers with high credit risk; and for loans syndicated by relationship‐based lenders or highly reputable lead arrangers. We then ask whether early access to private information in the loan market accelerates the speed of information arrival in stock prices. We document that the stock returns of firms identified with earlier private information dissemination to lenders indeed exhibit faster price discovery in the stock market, but only when institutional investors are involved in the firm's syndicated loans. Further, the positive relation between institutional lending and the speed of stock price discovery is more pronounced in relatively weak public disclosure environments. These results are consistent with institutional lenders systematically exploiting confidential syndicate information via trading in the equity market.     

The flight home effect: Evidence from the syndicated loan market during financial crises

This paper shows that the collapse of the global market for syndicated loans during financial crises can in part be explained by a flight home effect whereby lenders rebalance their loan portfolios in favor of domestic borrowers. The home bias of lenders' loan origination increases by approximately 20% if the bank's home country experiences a banking crisis. This flight home effect is distinct from flight to quality because borrowers of different quality are equally affected. The results indicate that the home bias in capital allocation tends to increase when adverse economic shocks reduce the wealth of international investors.     

Liquidity creation and funding ability during the interbank lending crunch

This study examines the portfolio response of US banks to the interbank lending collapse during the global financial crisis. The paper documents that a bank's response to the collapse of interbank markets is related to whether or not the bank was a net borrower or lender of funds. In particular, we find that typical borrowers had lower loan growth than typical lenders, but that the crisis did not differentially affect borrowers and lenders with respect to loan growth. However, borrowing and lending banks were differentially affected by the crisis in terms of their liquid asset growth. The typical borrowers reduced their liquid asset growth relative to lending banks during the crisis. We interpret this finding as saying that borrowing banks had to reduce their risky asset holdings because access to interbank funds had been reduced. The paper presents analogous analyses of the possible differential response of borrowers and lenders to changes in counterparty risk and lending through the Fed's TAF facility.     

Investment sensitivity to lender default shocks

We investigate how lender default shocks impact corporate investment. Lenders with recent default experience write stricter loan contracts, especially to borrowers with pre-existing relationships, leading to a reduction in real investment for all borrowing firms. The decline in investment is more pronounced when agency problems with creditors like asset substitution and claim dilution are higher. Moreover, the decline in investment is not attributable to more frequent covenant violations or to market conditions. The evidence highlights the role of supply-side frictions through the asset side of lenders’ balance sheets on corporate investment and how agency problems may act as mechanisms.     

Lending relationships when creditors are in control

Violations of financial covenants shift control rights to lenders. When borrowers have lending relationships with these lenders in control, they experience not only smaller declines in investment, but also lesser deteriorations in both firm survival probabilities and in sales. These effects are largely driven by opaque borrowers without any credit ratings. They are present where lending relationships existed already before loan issuance (ex-ante), but also where a contractual relationship without pre-issuance interaction is more mature (ex-post). Surprisingly, there is no evidence of any “dark side” of lending relationships when creditors are in control, such as an increase in interest expenses or a lesser degree of financial discipline.     

Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism

We provide large sample evidence that credible hedge commitments reduce the agency costs of debt and that accounting conservatism enhances hedge commitments. We examine 2,338 bank loans entered into by 263 mandatory derivative users that are contractually obligated by interest rate protection covenants, 709 voluntary derivative users, and 1,366 non-users. We show that loan contracts are more likely to include interest rate protection covenants when borrowers are less likely to maintain the hedge position once the financing is completed. We find that borrowers who credibly commit to hedge using these covenants significantly reduce their interest rates. While we do not find an average interest savings for voluntary derivative users, we do find a reduction in their loan rates when they practice conservative financial reporting. Our results suggest that accounting conservatism helps borrowers resolve shareholder-creditor conflicts by committing to maintain their hedge positions after completing debt financing.     

The effect of banks’ financial reporting on syndicated-loan structures

We explore how an accounting measure of information asymmetry between lead and participating lenders influences syndication structures by examining whether lead lenders’ commercial and industrial (C&I) loan-loss provision validity affects the fraction of loans they retain. We first conduct multiple tests showing that C&I provision validity reflects banks’ underlying screening and monitoring effectiveness. We then find lead lenders’ loan share decreases with C&I provision validity, but not with non-C&I provision validity. Consistent with an information effect, we further find this association is attenuated by (i) alternative information sources about the borrowers and (ii) previous lead/participant relationships and participant/borrower relationships.     

Legal Restrictions in Personal Loan Markets

This study examines the pricing of personal loans in the form of second mortgages to determine whether state-specific default laws have an effect on the availability and cost of that debt. We examine the pricing of loans to higher risk borrowers and whether borrowers in states that limit lender ability to seek default remedies pay higher credit costs. Our results indicate that, for the most part, lenders rationally price loans to higher risk borrowers. However, when we focus on borrowers with low credit scores, the results indicate that mean actual loan rates are higher than those predicted by our model. The results also indicate that state-specific default laws have an effect on the price of credit. Finally, the results show that there is a greater degree of error in the pricing of second mortgage loans to borrowers with low credit scores than to borrowers with high credit scores.